Making Interest Interesting!

“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t … pays it …” – Albert Einstein

Finance Stock photos by Vecteezy

Interest is something everyone encounters all the way through life, be it through savings, student loans or credit cards. It’s important to know that interest can work both in your favour or against you, and we want to make sure you are benefitting from interest!

What are Interest rates:

Interest rates are the return you get on savings, or pay on loans, set by both the Central bank (Bank of England) and commercial banks (your local NatWest or Santander).

Interest from Saving

When you put money in the bank, you will receive interest on your savings. For example, if you put £500 in a bank with a 5% interest rate, by the end of the year, you will have £525 in the account.

Interest from Borrowing

When you take out a loan from the bank, they will decide on the interest rates you pay on your loan. For example, if you take out a £10,000 loan from the bank, at a simple interest rate of 4%, you would have to pay back to the bank the original amount, £10,000, as well as the interest of £10,000 x 4% = £400.

Who decides the Interest Rates?

Interest rates are carefully decided by a country’s central bank (e.g. the Federal Reserve, or the Bank of England), considering a wide range of factors. For example, to combat high inflation, the central bank may increase the base interest rate, to encourage people to save. On the other hand, if there is low growth in a country, interest rates may fall, to encourage people to tale loans and spend more money.

Understanding Compound Interest

As Einstein stated, compound interest can either work for or against you, depending on how well you understand it! Compound interest is essentially interest on interest, where you are ultimately paying (or receiving) interest on the principal amount AND on prior interest.